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The bond market is torn by the potential of higher inflation and lower growth

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A man wearing a protective mask walks past 14 Wall Street in New York’s financial district on November 19, 2020.

Shannon Stapleton | Reuters

A volatile environment for government bonds reflects a very uncertain future for the US economy, indicating both slower growth and persistent inflation.

After a surge earlier this year that spooked markets, Treasury yields fell sharply as investors moved away from worries about price increases and turned to the potential that the rapid surge in post activity. -pandemic begins to slow down.

In the 1970s, the mix of higher prices and lower growth was called “stagflation,” a derogatory term that has garnered little attention since then, as inflation has remained under control over the past decades.

However, the word is coming up more and more these days as the growth chart gets cloudier.

“The market is trading on the topic of stagflation,” said Aneta Markowska, chief financial economist at Jefferies. “There is the idea that these price increases will destroy demand, cause policy error and ultimately slow growth.”

For her part, Markowska believes the trade that caused 10-year Treasury yields to drop from a high of around 1.75% in late March to around 1.18% earlier this week was a mistake. Yields are trading at opposite prices, so a drop there means investors are buying bonds and pushing prices up.

She sees a strong consumer and an upcoming eruption of supply, reversing the current bottleneck that pushed prices to their highest levels since before the 2008 financial crisis, as generating a lot of momentum to maintain growth. on the move without generating runaway inflation. Markowska predicts that the Federal Reserve will remain on the sidelines until at least 2023, despite recent market prices that the central bank will start raising rates at the end of 2022.

“The consensus is for 3% growth. I think we could grow 4% to 5% next year,” Markowska said. “Not only is the consumer still very healthy, but you’re going to have a massive replenishment of inventory at some point. Even if demand goes down, supply has so much catching up to do. You’re going to see the mother of all. restocking cycles. “

The bond market, which is generally viewed as the more subdued component of financial markets as opposed to the go-go stock market, doesn’t seem so convinced.

The low growth world is coming back

Measuring the impact of inflation

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